The newest version of Minecraft has a modified terrain generation system. Not only does this add new terrain features, but it fundamentally changes generation. For this reason, seeds used in previous version produce radically different results from the same seeds in the new version.

Because save files contain all previously-rendered chunks, it is my understanding that 1.7.3 maps will work in 1.8, and simply not have some of the new features. However, what happens when I move into areas of the map I haven't explored? Will it generate new chunks the 1.8 way, creating mis-matched boundaries? Or will it use the 1.7.3 terrain generator?

2 Answers
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It will create mis-matched boundaries, I've tried to create a map with 1.8, played on it a little and then re-installed 1.7.3 ... The biomes was a mess, no snow but water was turning to ice in normal biome, mountains were cut off abruptly to create new terrain from the 1.7.3 version.

So yeah it will work, but if you create the terrain on 1.7.3 or 1.8, it will stay as it is but new terrain will be generated compared on which version you are using.